Part 1 book “Horngren’s cost accounting - A managerial emphasis” has contents: the manager and management accounting, an introduction to cost terms and purposes, job costing, activity-based costing and activity-based management, master budget and responsibility accounting,… and other contents.
www.downloadslide.net www.downloadslide.net Horngren’s Cost Accounting A MANAGERIAL EMPHASIS Sixteenth Edition Global Edition Srikant M Datar Harvard University Madhav V Rajan Stanford University Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan www.downloadslide.net Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Senior Portfolio Manager: Ellen Geary Senior Acquisitions Editor, Global Edition: Sandhya Ghoshal Associate Project Editor, Global Edition: Paromita Banerjee Assistant Project Editor, Global Edition: Arka Basu Content Producer: Christine Donovan Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Field Marketing 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Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Horngren’s Cost Accounting: A Managerial Emphasis, 16th Edition, ISBN 978-0-13-447558-5 by Srikant M Datar and Madhav V Rajan, published by Pearson Education © 2018 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-21154-7 ISBN 13: 978-1-292-21154-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Sabon MT Pro by Integra-PDY IN Printed and bound by L.E.G.O in Italy www.downloadslide.net Brief Contents 10 11 12 13 14 The Manager and Management Accounting 15 16 17 18 19 20 21 22 Allocation of Support-Department Costs, Common Costs, and Revenues 23 Performance Measurement, Compensation, and Multinational Considerations 911 21 An Introduction to Cost Terms and Purposes Cost–Volume–Profit Analysis Job Costing 48 86 127 Activity-Based Costing and Activity-Based Management Master Budget and Responsibility Accounting 172 217 Flexible Budgets, Direct-Cost Variances, and Management Control 269 Flexible Budgets, Overhead Cost Variances, and Management Control Inventory Costing and Capacity Analysis Determining How Costs Behave 308 349 392 Decision Making and Relevant Information 446 Strategy, Balanced Scorecard, and Strategic Profitability Analysis Pricing Decisions and Cost Management 497 544 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 579 Cost Allocation: Joint Products and Byproducts Process Costing 621 663 695 Spoilage, Rework, and Scrap 738 Balanced Scorecard: Quality and Time 768 Inventory Management, Just-in-Time, and Simplified Costing Methods Capital Budgeting and Cost Analysis 838 Management Control Systems, Transfer Pricing, and Multinational Considerations 876 798 www.downloadslide.net Contents Relevant Range 55 Relationships Between Types of Costs 56 Total Costs and Unit Costs 56 Unit Costs 56 Use Unit Costs Cautiously 57 Business Sectors, Types of Inventory, Inventoriable Costs, and Period Costs 58 Manufacturing-, Merchandising-, and Service-Sector Companies 58 Types of Inventory 58 Commonly Used Classifications of Manufacturing Costs 59 Inventoriable Costs 59 Period Costs 59 Illustrating the Flow of Inventoriable Costs and Period Costs 60 Manufacturing-Sector Example 60 Recap of Inventoriable Costs and Period Costs 64 Prime Costs and Conversion Costs 65 Measuring Costs Requires Judgment 66 Measuring Labor Costs 66 Overtime Premium and Idle Time 66 Benefits of Defining Accounting Terms 67 Different Meanings of Product Costs 68 A Framework for Cost Accounting and Cost Management 69 Calculating the Cost of Products, Services, and Other Cost Objects 70 Obtaining Information for Planning and Control and Performance Evaluation 70 Analyzing the Relevant Information for Making Decisions 70 The Manager and Management Accounting 21 For Coca-Cola, Smaller Sizes Mean Bigger Profits Financial Accounting, Management Accounting, and Cost Accounting 22 Strategic Decisions and the Management Accountant 23 Value-Chain and Supply-Chain Analysis and Key Success Factors 24 Value-Chain Analysis 24 Supply-Chain Analysis 26 Key Success Factors 27 Concepts in Action: Trader Joe’s Recipe for Cost Leadership Decision Making, Planning, and Control: The Five-Step Decision-Making Process 29 Key Management Accounting Guidelines 32 Cost–Benefit Approach 32 Behavioral and Technical Considerations 33 Different Costs for Different Purposes 33 Organization Structure and the Management Accountant 33 Line and Staff Relationships 33 The Chief Financial Officer and the Controller 34 Management Accounting Beyond the Numbers 35 Professional Ethics 36 Institutional Support 36 Typical Ethical Challenges 37 Problem for Self-Study 39 | Decision Points 39 | Terms to Learn 40 | Assignment Material 40 | Questions 40 | Multiple-Choice Questions 41 | Exercises 41 | Problems 43 An Introduction to Cost Terms and Purposes 48 High Fixed Costs Bankrupt Quiksilver Costs and Cost Terminology 49 Direct Costs and Indirect Costs 49 Cost Allocation Challenges 50 Factors Affecting Direct/Indirect Cost Classifications 51 Cost-Behavior Patterns: Variable Costs and Fixed Costs 52 Concepts in Action: Zipcar Helps Twitter Reduce Fixed Costs Cost Drivers 54 Problem for Self-Study 71 | Decision Points 73 | Terms to Learn 74 | Assignment Material 74 | Questions 74 | Multiple-Choice Questions 75 | Exercises 76 | Problems 80 Cost–Volume–Profit Analysis 86 How Coachella Tunes Up the Sweet Sound of Profits Essentials of CVP Analysis 87 Contribution Margin 88 Expressing CVP Relationships 90 Cost–Volume–Profit Assumptions 93 Breakeven Point and Target Operating Income 93 Breakeven Point 93 Target Operating Income 94 Income Taxes and Target Net Income 96 Using CVP Analysis for Decision Making 98 www.downloadslide.net Contents Decision to Advertise 98 Decision to Reduce the Selling Price 98 Determining Target Prices 99 Concepts in Action: Cost–Volume–Profit Analysis Makes Subway’s $5 Foot-Long Sandwiches a Success But Innovation Challenges Loom Sensitivity Analysis and Margin of Safety 100 Cost Planning and CVP 102 Alternative Fixed-Cost/Variable-Cost Structures 102 Operating Leverage 103 Effects of Sales Mix on Income 105 CVP Analysis in Service and Not-for-Profit Organizations 107 Contribution Margin Versus Gross Margin 108 Problem for Self-Study 109 | Decision Points 110 APPendIx: decision Models and Uncertainty 111 Terms to Learn 114 | Assignment Material 115 | Questions 115 | Multiple-Choice Questions 115 | Exercises 116 | Problems 120 Job Costing 127 Job Costing and the World’s Tallest Building Building-Block Concepts of Costing Systems 128 Job-Costing and Process-Costing Systems 129 Job Costing: Evaluation and Implementation 130 Time Period Used to Compute Indirect-Cost Rates 131 Normal Costing 133 General Approach to Job Costing Using Normal Costing 133 Concepts in Action: The Job-Costing “Game Plan” at AT&T Stadium The Role of Technology 138 Actual Costing 138 A Normal Job-Costing System in Manufacturing 140 General Ledger 141 Explanations of Transactions 141 Subsidiary Ledgers 144 Materials Records by Type of Material 144 Labor Records by Employee 145 Manufacturing Department Overhead Records by Month 146 Work-in-Process Inventory Records by Jobs 146 Finished Goods Inventory Records by Jobs 147 Other Subsidiary Records 147 Nonmanufacturing Costs and Job Costing 147 Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 148 Underallocated and Overallocated Indirect Costs 148 Adjusted Allocation-Rate Approach 149 Proration Approach 149 Write-off to Cost of Goods Sold Approach 151 Choosing Among Approaches 152 Variations from Normal Costing: A Service-Sector Example 153 Problem for Self-Study 155 | Decision Points 157 | Terms to Learn 158 | Assignment Material 158 | Questions 158 | Multiple-Choice Questions 159 | Exercises 160 | Problems 166 Activity-Based Costing and Activity-Based Management 172 General Motors and Activity-Based Costing Broad Averaging and Its Consequences 173 Undercosting and Overcosting 173 Product-Cost Cross-Subsidization 174 Simple Costing System at Plastim Corporation 174 Design, Manufacturing, and Distribution Processes 174 Simple Costing System Using a Single Indirect-Cost Pool 175 Applying the Five-Step Decision-Making Process at Plastim 177 Refining A Costing System 178 Reasons for Refining a Costing System 179 Guidelines for Refining a Costing System 179 Activity-Based Costing Systems 180 Plastim’s ABC System 180 Cost Hierarchies 182 Implementing Activity-Based Costing 184 Implementing ABC at Plastim 184 Comparing Alternative Costing Systems 189 Considerations in Implementing Activity-Based Costing Systems 190 Benefits and Costs of Activity-Based Costing Systems 190 Behavioral Issues in Implementing Activity-Based Costing Systems 191 Activity-Based Management 192 Pricing and Product-Mix Decisions 192 Cost Reduction and Process Improvement Decisions 192 Design Decisions 193 Planning and Managing Activities 194 Activity-Based Costing and Department Costing Systems 194 ABC in Service and Merchandising Companies 195 Concepts in Action: Mayo Clinic Uses Time-driven Activity-Based Costing to Reduce Costs and Improve Care Problem for Self-Study 196 | Decision Points 199 | Terms to Learn 200 | Assignment Material 200 | Questions 200 | Multiple-Choice Questions 201 | Exercises 201 | Problems 208 www.downloadslide.net Contents Price Variances and Efficiency Variances for Direct-Cost Inputs 278 Price Variances 279 Efficiency Variance 279 Journal Entries Using Standard Costs 282 Implementing Standard Costing 284 Management’s Use of Variances 284 Multiple Causes of Variances 284 Concepts in Action: Can Chipotle Wrap Up Its Materials-Cost Variance Increases? When to Investigate Variances 285 Using Variances for Performance Measurement 286 Organization Learning 286 Continuous Improvement 287 Financial and Nonfinancial Performance Measures 287 Benchmarking and Variance Analysis 287 Master Budget and Responsibility Accounting 217 “Scrimping” at the Ritz: Master Budgets Budgets and the Budgeting Cycle 218 Strategic Plans and Operating Plans 218 Budgeting Cycle and Master Budget 219 Advantages and Challenges of Implementing Budgets 220 Promoting Coordination and Communication 220 Providing a Framework for Judging Performance and Facilitating Learning 220 Motivating Managers and Other Employees 221 Challenges in Administering Budgets 221 Developing an Operating Budget 222 Time Coverage of Budgets 222 Steps in Preparing an Operating Budget 222 Financial Planning Models and Sensitivity Analysis 235 Concepts in Action: 24 Hour Fitness and Internet-Based Budgeting Budgeting and Responsibility Accounting 237 Organization Structure and Responsibility 237 Feedback 238 Responsibility and Controllability 239 Human Aspects of Budgeting 240 Budgetary Slack 240 Stretch Targets 241 Kaizen Budgeting 242 Budgeting for Reducing Carbon Emissions 243 Budgeting in Multinational Companies 243 Problem for Self-Study 244 | Decision Points 245 APPendIx: The Cash Budget 246 Terms to Learn 252 | Assignment Material 252 | Questions 252 | Multiple-Choice Questions 253 | Exercises 253 | Problems 258 Flexible Budgets, Direct-Cost Variances, and Management Control 269 SingaDeli Bakery and Incentive Controls Static Budgets and Variances 270 The Use of Variances 270 Static Budgets and Static-Budget Variances 271 Flexible Budgets 273 Flexible-Budget Variances and Sales-Volume Variances 274 Sales-Volume Variances 274 Flexible-Budget Variances 275 Standard Costs for Variance Analysis 276 Obtaining Budgeted Input Prices and Budgeted Input Quantities 277 Problem for Self-Study 289 | Decision Points 290 APPendIx: Mix and Yield Variances for Substitutable Inputs 291 Terms to Learn 295 | Assignment Material 295 | Questions 295 | Multiple-Choice Questions 295 | Exercises 296 | Problems 300 Flexible Budgets, Overhead Cost Variances, and Management Control 308 Tesla Motors Gigafactory Planning of Variable and Fixed Overhead Costs 309 Planning Variable Overhead Costs 309 Planning Fixed Overhead Costs 309 Standard Costing at Webb Company 310 Developing Budgeted Variable Overhead Rates 310 Developing Budgeted Fixed Overhead Rates 311 Variable Overhead Cost Variances 312 Flexible-Budget Analysis 312 Variable Overhead Efficiency Variance 313 Variable Overhead Spending Variance 314 Journal Entries for Variable Overhead Costs and Variances 316 Fixed Overhead Cost Variances 317 Production-Volume Variance 318 Interpreting the Production-Volume Variance 319 Journal Entries for Fixed Overhead Costs and Variances 320 Concepts in Action: Variance Analysis and Standard Costing Help Sandoz Manage Its Overhead Costs Integrated Analysis of Overhead Cost Variances 323 4-Variance Analysis 323 Combined Variance Analysis 323 Production-Volume Variance and Sales-Volume Variance 325 Variance Analysis and Activity-Based Costing 327 www.downloadslide.net Contents Flexible Budget and Variance Analysis for Direct Materials-Handling Labor Costs 328 Flexible Budget and Variance Analysis for Fixed Setup Overhead Costs 330 Overhead Variances in Nonmanufacturing Settings 332 Financial and Nonfinancial Performance Measures 333 Problem for Self-Study 334 | Decision Points 336 | Terms to Learn 337 | Assignment Material 337 | Questions 337 | Multiple-Choice Questions 337 | Exercises 339 | Problems 343 Nonmanufacturing Costs 373 Activity-Based Costing 374 Problem for Self-Study 374 | Decision Points 376 APPendIx: Breakeven Points in Variable Costing and Absorption Costing 377 Terms to Learn 379 | Assignment Material 379 | Questions 379 | Multiple-Choice Questions 379 | Exercises 381 | Problems 385 10 Determining How Costs Behave 392 UPS Uses “Big Data” to Understand Its Costs While Helping the Environment Inventory Costing and Capacity Analysis 349 Basic Assumptions and Examples of Cost Functions 393 Basic Assumptions 393 Linear Cost Functions 393 Review of Cost Classification 395 Identifying Cost Drivers 396 The Cause-and-Effect Criterion 396 Cost Drivers and the Decision-Making Process 397 Cost Estimation Methods 397 Industrial Engineering Method 398 Conference Method 398 Account Analysis Method 398 Quantitative Analysis Method 399 Estimating a Cost Function Using Quantitative Analysis 400 High-Low Method 402 Regression Analysis Method 404 Evaluating and Choosing Cost Drivers 405 Cost Drivers and Activity-Based Costing 408 Nonlinear Cost Functions 409 Learning Curves 410 Cumulative Average-Time Learning Model 411 Incremental Unit-Time Learning Model 412 Incorporating Learning-Curve Effects into Prices and Standards 413 Concepts in Action: does Joint Strike Fighter Production Have a Learning Curve? Data Collection and Adjustment Issues 415 Lean Manufacturing Helps Boeing Work Through Its Backlog Variable and Absorption Costing 350 Variable Costing 350 Absorption Costing 350 Comparing Variable and Absorption Costing 350 Variable vs Absorption Costing: Operating Income and Income Statements 352 Comparing Income Statements for One Year 352 Comparing Income Statements for Multiple Years 354 Variable Costing and the Effect of Sales and Production on Operating Income 357 Absorption Costing and Performance Measurement 358 Undesirable Buildup of Inventories 359 Proposals for Revising Performance Evaluation 360 Comparing Inventory Costing Methods 361 Throughput Costing 361 A Comparison of Alternative Inventory-Costing Methods 362 Denominator-Level Capacity Concepts and Fixed-Cost Capacity Analysis 363 Absorption Costing and Alternative Denominator-Level Capacity Concepts 364 Effect on Budgeted Fixed Manufacturing Cost Rate 365 Choosing a Capacity Level 366 Product Costing and Capacity Management 366 Pricing Decisions and the Downward Demand Spiral 367 Concepts in Action: Can eSPn Avoid the Cord-Cutting “death Spiral”? Performance Evaluation 369 Financial Reporting 369 Tax Requirements 372 Planning and Control of Capacity Costs 372 Difficulties in Forecasting Chosen Denominator-Level Concept 372 Difficulties in Forecasting Fixed Manufacturing Costs 373 Problem for Self-Study 417 | Decision Points 419 APPendIx: Regression Analysis 420 Terms to Learn 429 | Assignment Material 429 | Questions 429 | Multiple-Choice Questions 430 | Exercises 430 | Problems 436 11 Decision Making and Relevant Information 446 Relevant Costs and Broadway Shows Information and the Decision Process 447 The Concept of Relevance 447 Relevant Costs and Relevant Revenues 447 www.downloadslide.net Contents Qualitative and Quantitative Relevant Information 449 One-Time-Only Special Orders 450 Potential Problems in Relevant-Cost Analysis 453 Short-Run Pricing Decisions 453 Insourcing-Versus-Outsourcing and Make-or-Buy Decisions 454 Outsourcing and Idle Facilities 454 Strategic and Qualitative Factors 456 International Outsourcing 456 The Total Alternatives Approach 457 Concepts in Action: Starbucks Brews Up domestic Production The Opportunity-Cost Approach 458 Carrying Costs of Inventory 461 Product-Mix Decisions with Capacity Constraints 462 Bottlenecks, Theory of Constraints, and Throughput-Margin Analysis 464 Customer Profitability and Relevant Costs 467 Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer 468 Relevant-Revenue and Relevant-Cost Analysis of Adding a Customer 470 Relevant-Revenue and Relevant-Cost Analysis of Closing or Adding Branch Offices or Business Divisions 470 Irrelevance of Past Costs and Equipment-Replacement Decisions 471 Decisions and Performance Evaluation 473 Problem for Self-Study 475 | Decision Points 477 APPendIx: Linear Programming 478 Terms to Learn 481 | Assignment Material 481 | Questions 481 | Multiple-Choice Questions 482 | Exercises 483 | Problems 488 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 497 Barclays Turns to the Balanced Scorecard What Is Strategy? 498 Building Internal Capabilities: Quality Improvement and Reengineering at Chipset 500 Strategy Implementation and the Balanced Scorecard 501 The Balanced Scorecard 501 Strategy Maps and the Balanced Scorecard 502 Implementing a Balanced Scorecard 508 Different Strategies Lead to Different Scorecards 509 Environmental and Social Performance and the Balanced Scorecard 509 Features of a Good Balanced Scorecard 513 Pitfalls in Implementing a Balanced Scorecard 514 Evaluating the Success of Strategy and Implementation 514 Strategic Analysis of Operating Income 515 Growth Component of Change in Operating Income 517 Price-Recovery Component of Change in Operating Income 518 Productivity Component of Change in Operating Income 519 Further Analysis of Growth, Price-Recovery, and Productivity Components 521 Concepts in Action: Operating Income Analysis Reveals Strategic Challenges at Best Buy Applying the Five-Step Decision-Making Framework to Strategy 524 Downsizing and the Management of Processing Capacity 524 Engineered and Discretionary Costs 524 Identifying Unused Capacity for Engineered and Discretionary Overhead Costs 525 Managing Unused Capacity 525 Problem for Self-Study 526 | Decision Points 530 APPendIx: Productivity Measurement 531 Terms to Learn 534 | Assignment Material 534 | Questions 534 | Multiple-Choice Questions 534 | Exercises 535 | Problems 537 13 Pricing Decisions and Cost Management 544 Extreme Pricing and Cost Management at IKEA Major Factors that Affect Pricing Decisions 545 Customers 545 Competitors 545 Costs 545 Weighing Customers, Competitors, and Costs 545 Costing and Pricing for the Long Run 546 Calculating Product Costs for Long-Run Pricing Decisions 547 Alternative Long-Run Pricing Approaches 548 Market-Based Approach: Target Costing for Target Pricing 550 Understanding Customers’ Perceived Value 550 Competitor Analysis 551 Implementing Target Pricing and Target Costing 551 Concepts in Action: H&M Uses Target Pricing to Bring Fast Fashion to Stores Worldwide Value Engineering, Cost Incurrence, and Locked-in Costs 553 Value-Chain Analysis and Cross-Functional Teams 553 Achieving the Target Cost per Unit for Provalue 554 Cost-Plus Pricing 557 Cost-Plus Target Rate of Return on Investment 557 Alternative Cost-Plus Methods 558 Cost-Plus Pricing and Target Pricing 559 www.downloadslide.net Contents Life-Cycle Product Budgeting and Costing 560 Life-Cycle Budgeting and Pricing Decisions 560 Managing Environmental and Sustainability Costs 562 Customer Life-Cycle Costing 562 Non-Cost Factors in Pricing Decisions 563 Price Discrimination 563 Peak-Load Pricing 563 International Pricing 563 Antitrust Laws and Pricing Decisions 564 The Supreme Court has not specified the “appropriate measure of costs.” 564 15 Cost Allocation and “Smart Grid” Energy Infrastructure Allocating Support Department Costs Using the Single-Rate and Dual-Rate Methods 622 Single-Rate and Dual-Rate Methods 622 Allocation Based on the Demand for (or Usage of) Materials-Handling Services 623 Allocation Based on the Supply of Capacity 624 Advantages and Disadvantages of Single-Rate Method 626 Advantages and Disadvantages of Dual-Rate Method 626 Budgeted Versus Actual Costs and the Choice of Allocation Base 627 Budgeted Versus Actual Rates 627 Budgeted Versus Actual Usage 628 Fixed-Cost Allocation Based on Budgeted Rates and Budgeted Usage 628 Fixed-Cost Allocation Based on Budgeted Rates and Actual Usage 628 Allocating Budgeted Fixed Costs Based on Actual Usage 629 Allocating Costs of Multiple Support Departments 630 Direct Method 633 Step-Down Method 634 Reciprocal Method 635 Overview of Methods 639 Calculating the Cost of Job WPP 298 639 Allocating Common Costs 641 Stand-Alone Cost-Allocation Method 641 Incremental Cost-Allocation Method 642 Cost Allocations and Contract Disputes 643 Bundled Products and Revenue Allocation Methods 644 Bundling and Revenue Allocation 644 Concepts in Action: Contract disputes over Reimbursable Costs with the U.S Government Stand-Alone Revenue-Allocation Method 646 Incremental Revenue-Allocation Method 647 Problem for Self-Study 565 | Decision Points 567 | Terms to Learn 568 | Assignment Material 569 | Questions 569 | Multiple-Choice Questions 569 | Exercises 569 | Problems 573 14 Cost Allocation, CustomerProfitability Analysis, and SalesVariance Analysis 579 Delta Flies from Frequent Flyers to Big Spenders Customer-Profitability Analysis 580 Customer-Revenue Analysis 580 Customer-Cost Analysis 581 Customer-Level Costs 582 Customer-Profitability Profiles 585 Presenting Profitability Analysis 586 Concepts in Action: Amazon Prime and Customer Profitability Using the Five-Step Decision-Making Process to Manage Customer Profitability 588 Cost-Hierarchy-Based Operating Income Statement 589 Criteria to Guide Cost Allocations 591 Fully Allocated Customer Profitability 593 Implementing Corporate and Division Cost Allocations 594 Issues in Allocating Corporate Costs to Divisions and Customers 597 Using Fully Allocated Costs for Decision Making 598 Sales Variances 599 Static-Budget Variance 600 Flexible-Budget Variance and Sales-Volume Variance 600 Sales-Mix Variance 601 Sales-Quantity Variance 602 Market-Share and Market-Size Variances 603 Market-Share Variance 603 Market-Size Variance 603 Problem for Self-Study 605 | Decision Points 607 | Terms to Learn 608 | Assignment Material 608 | Questions 608 | Multiple-Choice Questions 609 | Exercises 609 | Problems 614 Allocation of Support-Department Costs, Common Costs, and Revenues 621 Problem for Self-Study 649 | Decision Points 652 | Terms to Learn 653 | Assignment Material 653 | Questions 653 | Exercises 653 | Problems 657 16 Cost Allocation: Joint Products and Byproducts 663 Joint-Cost Allocation and the Wounded Warrior Project Joint-Cost Basics 664 Allocating Joint Costs 665 Approaches to Allocating Joint Costs 666 www.downloadslide.net 480 ChaPter 11 deCision MaKing and releVant inforMation exact coordinates in the graph To illustrate, the corner point (S = 75, B = 90) can be derived by solving the two pertinent constraint inequalities as simultaneous equations: Multiplying (2) by 2: Subtracting (3) from (1): Therefore, Substituting for B in (2): 2S + 5B 1S + 0.5B 2S + B 4B B = 360 , 1S + 0.5(90) S = 120 - 45 = = = = = = = 600 (1) 120 (2) 240 (3) 360 90 120 75 Given S = 75 snowmobile engines and B = 90 boat engines, TCM = ($240 per snowmobile engine * 75 snowmobile engines) + ($375 per boat engine * 90 boat engines) = $51,750 Second, move from corner point to corner point and compute the total contribution margin at each corner point Trial a Corner Point (S, B) (0, 0) (0, 110) (25,110) (75, 90) (120, 0) Snowmobile Engines (S) 0 25 75 120 Boat Engines (B) 110 110 90 Total Contribution Margin $240(0) + $375(0) = $0 $240(0) + $375(110) = $41,250 $240(25) + $375(110) = $47,250 $240(75) + $375(90) = $51,750a $240(120) + $375(0) = $28,800 The optimal solution The optimal product mix is the mix that yields the highest total contribution: 75 snowmobile engines and 90 boat engines To understand the solution, consider what happens when moving from the point (25, 110) to (75, 90) Power Recreation gives up $7,500 [$375 * (110 - 90)] in contribution margin from boat engines while gaining $12,000 [$240 * (75 - 25)] in contribution margin from snowmobile engines This results in a net increase in contribution margin of $4,500 ($12,000 - $7,500), from $47,250 to $51,750 Graphic Approach Consider all possible combinations that will produce the same total contribution margin of, say, $12,000 That is, $240S + $375B = $12,000 This set of $12,000 contribution margins is a straight dashed line through [S = 50 ($12,000 , $240); B = 0] and [S = 0; B = 32 ($12,000 , $375)] in Exhibit 11-14 Other equal total contribution margins can be represented by lines parallel to this one In Exhibit 11-14, we show three dashed lines Lines drawn farther from the origin represent more sales of both products and higher amounts of equal contribution margins The optimal line is the one farthest from the origin but still passing through a point in the area of feasible solutions This line represents the highest total contribution margin The optimal solution—the number of snowmobile engines and boat engines that will maximize the objective function, total contribution margin—is the corner point (S = 75, B = 90) This solution will become apparent if you put a straight-edge ruler on the graph and move it outward from the origin and parallel with the $12,000 contribution margin line Move the ruler as far away from the origin as possible—that is, increase the total contribution margin—without leaving the area of feasible solutions In general, the optimal solution in a maximization problem lies at the corner where the dashed line intersects an extreme point of the area of feasible solutions Moving the ruler out any farther puts it outside the area of feasible solutions www.downloadslide.net assignMent Material 481 Sensitivity Analysis What are the implications of uncertainty about the accounting or technical coefficients used in the objective function (such as the contribution margin per unit of snowmobile engines or boat engines) or the constraints (such as the number of machine-hours it takes to make a snowmobile engine or a boat engine)? Consider how a change in the contribution margin of snowmobile engines from $240 to $300 per unit would affect the optimal solution Assume the contribution margin for boat engines remains unchanged at $375 per unit The revised objective function will be: TCM = $300S + $375B Using the trial-and-error approach to calculate the total contribution margin for each of the five corner points described in the previous table, the optimal solution is still (S = 75, B = 90) What if the contribution margin of snowmobile engines falls to $160 per unit? The optimal solution remains the same (S = 75, B = 90) Thus, big changes in the contribution margin per unit of snowmobile engines have no effect on the optimal solution in this case That’s because, although the slopes of the equal contribution margin lines in Exhibit 11-14 change as the contribution margin of snowmobile engines changes from $240 to $300 to $160 per unit, the farthest point at which the equal contribution margin lines intersect the area of feasible solutions is still (S = 75, B = 90) termS to learn This chapter and the Glossary at the end of the book contain definitions of the following important terms: book value (p 471) business function costs (p 450) constraint (p 479) decision model (p 447) differential cost (p 456) differential revenue (p 456) full costs of the product (p 450) incremental cost (p 456) incremental revenue (p 456) insourcing (p 454) linear programming (LP) (p 479) make-or-buy decisions (p 454) objective function (p 478) one-time-only special order (p 450) opportunity cost (p 458) outsourcing (p 454) product-mix decisions (p 462) qualitative factors (p 449) quantitative factors (p 449) relevant costs (p 447) relevant revenues (p 447) sunk costs (p 448) theory of constraints (TOC) (p 464) throughput margin (p 464) aSSignment material Questions 11-1 11-2 11-3 11-4 11-5 11-6 11-7 Outline the five-step sequence in a decision process Define relevant costs Why are historical costs irrelevant? “All future costs are relevant.” Do you agree? Why? Distinguish between quantitative and qualitative factors in decision making Describe two potential problems that should be avoided in relevant-cost analysis “Variable costs are always relevant, and fixed costs are always irrelevant.” Do you agree? Why? “A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit.” Do you agree? Why? 11-8 Define opportunity cost 11-9 “Managers should always buy inventory in quantities that result in the lowest purchase cost per unit.” Do you agree? Why? 11-10 “Management should always maximize sales of the product with the highest contribution margin per unit.” Do you agree? Why? Pearson MyLab Accounting www.downloadslide.net 482 ChaPter 11 deCision MaKing and releVant inforMation 11-11 “A branch office or business segment that shows negative operating income should be shut down.” Do you agree? Explain briefly 11-12 “Cost written off as depreciation on equipment already purchased is always irrelevant.” Do you agree? Why? 11-13 “Managers will always choose the alternative that maximizes operating income or minimizes costs in the decision model.” Do you agree? Why? 11-14 Describe the three steps in solving a linear programming problem 11-15 How might the optimal solution of a linear programming problem be determined? Pearson MyLab Accounting Multiple-Choice Questions In partnership with: 11-16 Qualitative and quantitative factors Which of the following is not a qualitative factor that Atlas Manufacturing should consider when deciding whether to buy or make a part used in manufacturing their product? a Quality of the outside producer’s product b Potential loss of trade secrets c Manufacturing deadlines and special orders d Variable cost per unit of the product 11-17 Special order, opportunity cost Chade Corp is considering a special order brought to it by a new client If Chade determines the variable cost to be $9 per unit, and the contribution margin of the next best alternative of the facility to be $5 per unit, then if Chade has: a Full capacity, the company will be profitable at $4 per unit b Excess capacity, the company will be profitable at $6 per unit c Full capacity, the selling price must be greater than $5 per unit d Excess capacity, the selling price must be greater than $9 per unit 11-18 Special order, opportunity cost In order to determine whether a special order should be accepted at full capacity, the sales price of the special order must be compared to the per unit: a Contribution margin of the special order b Variable cost and contribution margin of the special order c Variable cost and contribution margin of the next best alternative d Variable cost of current production and the contribution margin of the next best alternative 11-19 Keep or drop a business segment Lees Corp is deciding whether to keep or drop a small segment of its business Key information regarding the segment includes: Contribution margin: 35,000 Avoidable fixed costs: 30,000 Unavoidable fixed costs: 25,000 Given the information above, Lees should: a Drop the segment because the contribution margin is less than total fixed costs b Drop the segment because avoidable fixed costs exceed unavoidable fixed costs c Keep the segment because the contribution margin exceeds avoidable fixed costs d Keep the segment because the contribution margin exceeds unavoidable fixed costs 11-20 Relevant costs Ace Cleaning Service is considering expanding into one or more new market areas Which costs are relevant to Ace’s decision on whether to expand? a b c d Sunk Costs No Yes No Yes Variable Costs Yes Yes Yes No Opportunity Costs Yes Yes No Yes ©2016 DeVry/Becker Educational Development Corp All Rights Reserved www.downloadslide.net assignMent Material Exercises 483 Pearson MyLab Accounting 11-21 Disposal of assets Answer the following questions A company has an inventory of 1,250 assorted parts for a line of missiles that has been discontinued The inventory cost is $76,000 The parts can be either (a) remachined at total additional costs of $26,500 and then sold for $33,500 or (b) sold as scrap for $2,500 Which action is more profitable? Show your calculations A truck, costing $100,500 and uninsured, is wrecked on its first day in use It can be either (a) disposed of for $18,000 cash and replaced with a similar truck costing $103,000 or (b) rebuilt for $88,500 and thus be brand new as far as operating characteristics and looks are concerned Which action is less costly? Show your calculations 11-22 Relevant and irrelevant costs Answer the following questions DeCesare Computers makes 5,200 units of a circuit board, CB76, at a cost of $280 each Variable cost per unit is $190 and fixed cost per unit is $90 Peach Electronics offers to supply 5,200 units of CB76 for $260 If DeCesare buys from Peach it will be able to save $10 per unit in fixed costs but continue to incur the remaining $80 per unit Should DeCesare accept Peach’s offer? Explain LN Manufacturing is deciding whether to keep or replace an old machine It obtains the following information: Original cost Useful life Current age Remaining useful life Accumulated depreciation Book value Current disposal value (in cash) Terminal disposal value (3 years from now) Annual cash operating costs Old Machine $10,700 10 years years years $7,490 $3,210 $2,200 $0 $17,500 New Machine $9,000 years years years Not acquired yet Not acquired yet Not acquired yet $0 $15,500 LN Manufacturing uses straight-line depreciation Ignore the time value of money and income taxes Should LN Manufacturing replace the old machine? Explain 11-23 Multiple choice (CPA) Choose the best answer The Dalton Company manufactures slippers and sells them at $12 a pair Variable manufacturing cost is $5.00 a pair, and allocated fixed manufacturing cost is $1.25 a pair It has enough idle capacity available to accept a one-time-only special order of 5,000 pairs of slippers at $6.25 a pair Dalton will not incur any marketing costs as a result of the special order What would the effect on operating income be if the special order could be accepted without affecting normal sales: (a) $0, (b) $6,250 increase, (c) $28,750 increase, or (d) $31,250 increase? Show your calculations The Sacramento Company manufactures Part No 498 for use in its production line The manufacturing cost per unit for 30,000 units of Part No 498 is as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead allocated Total manufacturing cost per unit $ 22 15 $50 The Counter Company has offered to sell 30,000 units of Part No 498 to Sacramento for $47 per unit Sacramento will make the decision to buy the part from Counter if there is an overall savings of at least $30,000 for Sacramento If Sacramento accepts Counter’s offer, $8 per unit of the fixed overhead allocated would be eliminated Furthermore, Sacramento has determined that the released facilities could be used to save relevant costs in the manufacture of Part No 575 For Sacramento to achieve an overall savings of $30,000, the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of Part No 575 would be which of the following: (a) $90,000, (b) $150,000, (c) $180,000, or (d) $210,000? Show your calculations What other factors might Sacramento consider before outsourcing to Counter? www.downloadslide.net 484 ChaPter 11 deCision MaKing and releVant inforMation 11-24 Special order, activity-based costing (CMA, adapted) The Gold Plus Company manufactures medals for winners of athletic events and other contests Its manufacturing plant has the capacity to produce 11,000 medals each month Current production and sales are 10,000 medals per month The company normally charges $150 per medal Cost information for the current activity level is as follows: Variable costs that vary with number of units produced Direct materials Direct manufacturing labor Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 200 batches * $500 per batch Fixed manufacturing costs Fixed marketing costs Total costs $ 350,000 375,000 100,000 300,000 275,000 $1,400,000 Gold Plus has just received a special one-time-only order for 1,000 medals at $100 per medal Accepting the special order would not affect the company’s regular business Gold Plus makes medals for its existing customers in batch sizes of 50 medals (200 batches * 50 medals per batch = 10,000 medals) The special order requires Gold Plus to make the medals in 25 batches of 40 medals Required Should Gold Plus accept this special order? Show your calculations Suppose plant capacity were only 10,500 medals instead of 11,000 medals each month The special order must either be taken in full or be rejected completely Should Gold Plus accept the special order? Show your calculations As in requirement 1, assume that monthly capacity is 11,000 medals Gold Plus is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled They would argue that Gold Plus’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs Should Gold Plus accept the special order under these conditions? Show your calculations 11-25 Make versus buy, activity-based costing The Svenson Corporation manufactures cellular modems It manufactures its own cellular modem circuit boards (CMCB), an important part of the cellular modem It reports the following cost information about the costs of making CMCBs in 2017 and the expected costs in 2018: Current Costs in 2017 Variable manufacturing costs Direct material cost per CMCB Direct manufacturing labor cost per CMCB Variable manufacturing cost per batch for setups, materials handling, and quality control Fixed manufacturing cost Fixed manufacturing overhead costs that can be avoided if CMCBs are not made Fixed manufacturing overhead costs of plant depreciation, insurance, and administration that cannot be avoided even if CMCBs are not made $ 180 50 Expected Costs in 2018 $ 170 45 1,600 1,500 320,000 320,000 800,000 800,000 Svenson manufactured 8,000 CMCBs in 2017 in 40 batches of 200 each In 2018, Svenson anticipates needing 10,000 CMCBs The CMCBs would be produced in 80 batches of 125 each The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in 2018 at $300 per CMCB on whatever delivery schedule Svenson wants Required Calculate the total expected manufacturing cost per unit of making CMCBs in 2018 Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases CMCBs from Minton On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations www.downloadslide.net assignMent Material Now suppose that if Svenson purchases CMCBs from Minton, its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the Essex Corporation Svenson estimates the following incremental revenues and costs from CB3s: Total expected incremental future revenues Total expected incremental future costs $2,000,000 $2,150,000 On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations 11-26 Inventory decision, opportunity costs Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year Best Trim estimates that 17,000 spark plugs will be required each month A supplier quotes a price of $9 per spark plug The supplier also offers a special discount option: If all 204,000 spark plugs are purchased at the start of the year, a discount of 2% off the $9 price will be given Best Trim can invest its cash at 10% per year It costs Best Trim $260 to place each purchase order What is the opportunity cost of interest forgone from purchasing all 204,000 units at the start of the year instead of in 12 monthly purchases of 17,000 units per order? Would this opportunity cost be recorded in the accounting system? Why? Should Best Trim purchase 204,000 units at the start of the year or 17,000 units each month? Show your calculations What other factors should Best Trim consider when making its decision? Required 11-27 Relevant costs, contribution margin, product emphasis The Beach Comber is a take-out food store at a popular beach resort Sara Miller, owner of the Beach Comber, is deciding how much refrigerator space to devote to four different drinks Pertinent data on these four drinks are as follows: Selling price per case Variable cost per case Cases sold per foot of shelf space per day Cola $19.10 $14.40 10 Lemonade $20.25 $15.90 24 Punch $27.10 $21.50 25 Natural Orange Juice $39.50 $29.80 22 Miller has a maximum front shelf space of 12 feet to devote to the four drinks She wants a minimum of foot and a maximum of feet of front shelf space for each drink Calculate the contribution margin per case of each type of drink A coworker of Miller’s recommends that she maximize the shelf space devoted to those drinks with the highest contribution margin per case Do you agree with this recommendation? Explain briefly What shelf-space allocation for the four drinks would you recommend for the Beach Comber? Show your calculations 11-28 Selection of most profitable products Isochlorine is produced in a chemical process that is very threatening to the environment As a result of this, the government has limited the yearly production Company Soleil uses isochlorine to produce four cosmetic products A, B, C, and D Soleil has an inventory of 2,000 kg of isochlorine at a value of $20,000 As a result of production restrictions imposed on their supplier, Soleil will not be able to purchase additional isochlorine during the coming period Although Soleil, by means of its commercial campaign, suggests that its main goal is to let people experience the sanitary effects of its cosmetic products, the management is only interested in profit maximization The management of Soleil must decide how to use the scarce material The following information is available concerning the next period: Product A B C D Sales 3,000 8,000 4,000 5,000 Selling Price per Unit $ 70 $ 60 $100 $ 80 Labor-Hours per Unit 1.0 1.2 2.0 1.0 Material per Unit (Grams) 500 300 600 800 Required 485 www.downloadslide.net 486 ChaPter 11 Required deCision MaKing and releVant inforMation The labor tariff per hour is $30 Labor costs are linear variable Sales provision is 10% of the selling price Which products must Soleil produce during the next period? What is the contribution margin for the next period? Show your calculations 11-29 Theory of constraints, throughput margin, relevant costs The Pierce Corporation manufactures filing cabinets in two operations: machining and finishing It provides the following information: Annual capacity Annual production Fixed operating costs (excluding direct materials) Fixed operating costs per unit produced ($540,000 ÷ 90,000; $270,000 ÷ 90,000) Machining 110,000 units 90,000 units $540,000 $6 per unit Finishing 90,000 units 90,000 units $270,000 $3 per unit Each cabinet sells for $70 and has direct material costs of $30 incurred at the start of the machining operation Pierce has no other variable costs Pierce can sell whatever output it produces The following requirements refer only to the preceding data There is no connection between the requirements Required Pierce is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1,150 units The annual cost of these jigs and tools is $35,000 Should Pierce acquire these tools? Show your calculations The production manager of the Machining Department has submitted a proposal to faster setups that would increase the annual capacity of the Machining Department by 9,000 units and would cost $4,000 per year Should Pierce implement the change? Show your calculations An outside contractor offers to the finishing operation for 9,500 units at $9 per unit, triple the $3 per unit that it costs Pierce to the finishing in-house Should Pierce accept the subcontractor’s offer? Show your calculations The Hammond Corporation offers to machine 5,000 units at $3 per unit, half the $6 per unit that it costs Pierce to the machining in-house Should Pierce accept Hammond’s offer? Show your calculations Pierce produces 1,700 defective units at the machining operation What is the cost to Pierce of the defective items produced? Explain your answer briefly Pierce produces 1,700 defective units at the finishing operation What is the cost to Pierce of the defective items produced? Explain your answer briefly 11-30 Closing and opening stores Sanchez Corporation runs two convenience stores, one in Connecticut and one in Rhode Island Operating income for each store in 2017 is as follows: Revenues Operating costs Cost of goods sold Lease rent (renewable each year) Labor costs (paid on an hourly basis) Depreciation of equipment Utilities (electricity, heating) Allocated corporate overhead Total operating costs Operating income (loss) Connecticut Store $1,070,000 Rhode Island Store $ 860,000 750,000 90,000 42,000 25,000 43,000 50,000 1,000,000 $ 70,000 660,000 75,000 42,000 22,000 46,000 40,000 885,000 $ (25,000) The equipment has a zero disposal value In a senior management meeting, Maria Lopez, the management accountant at Sanchez Corporation, makes the following comment, “Sanchez can increase its profitability by closing down the Rhode Island store or by adding another store like it.” Required By closing down the Rhode Island store, Sanchez can reduce overall corporate overhead costs by $44,000 Calculate Sanchez’s operating income if it closes the Rhode Island store Is Maria Lopez’s statement about the effect of closing the Rhode Island store correct? Explain Calculate Sanchez’s operating income if it keeps the Rhode Island store open and opens another store with revenues and costs identical to the Rhode Island store (including a cost of $22,000 to acquire equipment with a one-year useful life and zero disposal value) Opening this store will increase corporate overhead costs by $4,000 Is Maria Lopez’s statement about the effect of adding another store like the Rhode Island store correct? Explain www.downloadslide.net assignMent Material 11-31 Choosing customers Rodeo Printers operates a printing press with a monthly capacity of 4,000 machine-hours Rodeo has two main customers: Trent Corporation and Julie Corporation Data on each customer for January are: Trent Corporation $210,000 84,000 126,000 102,000 $ 24,000 3,000 hours Revenues Variable costs Contribution margin Fixed costs (allocated) Operating income Machine-hours required Julie Corporation $140,000 85,000 55,000 68,000 $ (13,000) 1,000 hours Total $350,000 169,000 181,000 170,000 $ 11,000 4,000 hours Julie Corporation indicates that it wants Rodeo to an additional $140,000 worth of printing jobs during February These jobs are identical to the existing business Rodeo did for Julie in January in terms of variable costs and machine-hours required Rodeo anticipates that the business from Trent Corporation in February will be the same as that in January Rodeo can choose to accept as much of the Trent and Julie business for February as its capacity allows Assume that total machine-hours and fixed costs for February will be the same as in January What action should Rodeo take to maximize its operating income? Show your calculations What other factors should Rodeo consider before making a decision? Required 11-32 Relevance of equipment costs Papa’s Pizza is considering replacement of its pizza oven with a new, more energy-efficient model Information related to the old and new pizza ovens follows: Old oven—original cost Old oven—book value Old oven—current market value Old oven—annual operating cost New oven—purchase price New oven—installation cost New oven—annual operating cost $60,000 $50,000 $42,000 $14,000 $75,000 $ 2,000 $ 6,000 The old oven had been purchased a year ago Papa’s Pizza estimates that either oven has a remaining useful life of five years At the end of five years, either oven would have a zero salvage value Ignore the effect of income taxes and the time value of money Which of the costs and benefits above are relevant to the decision to replace the oven? What information is irrelevant? Why is it irrelevant? Should Papa’s Pizza purchase the new oven? Provide support for your answer Is there any conflict between the decision model and the incentives of the manager who has purchased the “old” oven and is considering replacing it a year later? At what purchase price would Papa’s Pizza be indifferent between purchasing the new oven and continuing to use the old oven? 11-33 Equipment upgrade versus replacement (A Spero, adapted) The TechGuide Company produces and sells 7,500 modular computer desks per year at a selling price of $750 each Its current production equipment, purchased for $1,800,000 and with a five-year useful life, is only two years old It has a terminal disposal value of $0 and is depreciated on a straight-line basis The equipment has a current disposal price of $450,000 However, the emergence of a new molding technology has led TechGuide to consider either upgrading or replacing the production equipment The following table presents data for the two alternatives: $ One-time equipment costs Variable manufacturing cost per desk Remaining useful life of equipment (in years) Terminal disposal value of equipment % Upgrade $3,000,000 $ 150 $ & Replace $4,800,000 75 $ $ Required 487 www.downloadslide.net 488 ChaPter 11 deCision MaKing and releVant inforMation All equipment costs will continue to be depreciated on a straight-line basis For simplicity, ignore income taxes and the time value of money Required Pearson MyLab Accounting Should TechGuide upgrade its production line or replace it? Show your calculations Now suppose the one-time equipment cost to replace the production equipment is somewhat negotiable All other data are as given previously What is the maximum one-time equipment cost that TechGuide would be willing to pay to replace rather than upgrade the old equipment? Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise, but that the production and sales quantity is not known For what production and sales quantity would TechGuide (i) upgrade the equipment or (ii) replace the equipment? Assume that all data are as given in the original exercise Dan Doria is TechGuide’s manager, and his bonus is based on operating income Because he is likely to relocate after about a year, his current bonus is his primary concern Which alternative would Doria choose? Explain Problems 11-34 Special order, short-run pricing GamesAhoy Corporation produces cricket bats for kids that it sells for $36 each At capacity, the company can produce 50,000 bats a year The costs of producing and selling 50,000 bats are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses Total costs Required Cost per Bat $13 $31 Total Costs $ 650,000 250,000 100,000 300,000 150,000 100,000 $1,550,000 Suppose GamesAhoy is currently producing and selling 40,000 bats At this level of production and sales, its fixed costs are the same as given in the preceding table FieldTactics Corporation wants to place a one-time special order for 10,000 bats at $23 each GamesAhoy will incur no variable selling costs for this special order Should GamesAhoy accept this one-time special order? Show your calculations Now suppose GamesAhoy is currently producing and selling 50,000 bats If GamesAhoy accepts FieldTactics’ offer it will have to sell 10,000 fewer bats to its regular customers (a) On financial considerations alone, should GamesAhoy accept this one-time special order? Show your calculations (b) On financial considerations alone, at what price would GamesAhoy be indifferent between accepting the special order and continuing to sell to its regular customers at $36 per bat (c) What other factors should GamesAhoy consider in deciding whether to accept the one-time special order? 11-35 Short-run pricing, capacity constraints Fashion Fabrics makes pants from a special material The fabric is special because of the way it fits many body types The pants sell for $142 A well-known retail establishment has asked Fashion Fabrics to produce 3,000 shorts from the same fabric The factory has unused capacity, so Barbara Brooks, the owner of Fashion Fabrics, calculates the cost of making a pair of shorts from the fabric Costs for the pants and shorts are as follows: Fabric (6 yds * $12; yds * $12) Variable direct manufacturing labor Variable manufacturing overhead Fixed manufacturing cost allocated Total manufacturing cost Required Pants $ 72 20 15 $115 Shorts 36 10 $59 Suppose Fashion Fabrics can acquire all the fabric that it needs What is the minimum price the company should charge for the shorts? Now suppose that the fabric is in short supply Every yard of fabric Fashion Fabrics uses to make shorts will reduce the pants that it can make and sell What is the minimum price the company should charge for the shorts? www.downloadslide.net assignMent Material 11-36 International outsourcing Cuddly Critters, Inc., manufactures plush toys in a facility in Queensland, Brisbane Recently, the company designed a group of collectible resin figurines to go with the plush toy line Management is trying to decide whether to manufacture the figurines themselves in existing space in the Queensland facility or to accept an offer from a manufacturing company in Indonesia Data concerning the decision are: Expected annual sales of figurines (in units) Average selling price of a figurine Price quoted by Indonesian company, in Indonesian Rupiah (IDR), for each figurine Current exchange rate Variable manufacturing costs Incremental annual fixed manufacturing costs associated with the new product line Variable selling and distribution costsa Annual fixed selling and distribution costsa 400,000 $5 27,300 IDR 9,100 IDR = $1 $2.85 per unit $200,000 $0.50 per unit $285,000 a Selling and distribution costs are the same regardless of whether the figurines are manufactured in Cleveland or imported Should Cuddly Critters manufacture the 400,000 figurines in the Queensland facility or purchase them from the Indonesian supplier? Explain Cuddly Critters believes that the dollar may weaken in the coming months against the Indonesian rupiah and does not want to face any currency risk Assume that Cuddly Critters can enter into a forward contract today to purchase 27,300 IDRs for $3.40 Should Cuddly Critters manufacture the 400,000 figurines in the Queensland facility or purchase them from the Indonesian supplier? Explain What are some of the qualitative factors that Cuddly Critters should consider when deciding whether to outsource the figurine manufacturing to Indonesia? Required 11-37 Relevant costs, opportunity costs Gavin Martin, the general manager of Oregano Software, must decide when to release the new version of Oregano’s spreadsheet package, Easyspread 2.0 Development of Easyspread 2.0 is complete; however, the diskettes, compact discs, and user manuals have not yet been produced The product can be shipped starting July 1, 2017 The major problem is that Oregano has overstocked the previous version of its spreadsheet package, Easyspread 1.0 Martin knows that once Easyspread 2.0 is introduced, Oregano will not be able to sell any more units of Easyspread 1.0 Rather than just throwing away the inventory of Easyspread 1.0, Martin is wondering if it might be better to continue to sell Easyspread 1.0 for the next three months and introduce Easyspread 2.0 on October 1, 2017, when the inventory of Easyspread 1.0 will be sold out The following information is available: Selling price Variable cost per unit of diskettes, compact discs, user manuals Development cost per unit Marketing and administrative cost per unit Total cost per unit Operating income per unit Easyspread 1.0 $165 24 60 31 115 $ 50 Easyspread 2.0 $215 38 95 41 174 $ 41 Development cost per unit for each product equals the total costs of developing the software product divided by the anticipated unit sales over the life of the product Marketing and administrative costs are fixed costs in 2017, incurred to support all marketing and administrative activities of Oregano Software Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each product The preceding unit costs assume Easyspread 2.0 will be introduced on October 1, 2017 On the basis of financial considerations alone, should Martin introduce Easyspread 2.0 on July 1, 2017, or wait until October 1, 2017? Show your calculations, clearly identifying relevant and irrelevant revenues and costs What other factors might Gavin Martin consider in making a decision? Required 489 www.downloadslide.net 490 ChaPter 11 deCision MaKing and releVant inforMation 11-38 Opportunity costs and relevant costs Jason Wu operates Exclusive Limousines, a fleet of 10 limousines used for weddings, proms, and business events in Washington, D.C Wu charges customers a flat fee of $250 per car taken on contract plus an hourly fee of $80 His income statement for May follows: $150,000 Revenue (200 contracts * $250) + (1,250 hours * $80) Operating expenses: Driver wages and benefits ($35 per hour * 1,250 hours) Depreciation on limousines Fuel costs ($12.80 per hour * 1,250 hours) Maintenance Liability and casualty insurance Advertising Administrative expenses Total expenses Operating income 43,750 19,000 16,000 18,400 2,500 10,500 24,200 134,350 $ 15,650 All expenses are fixed, with the exception of driver wages and benefits and fuel costs, which are both variable per hour During May, the company’s limousines were fully booked In June, Wu expects that Exclusive Limousines will be operating near capacity Shelly Worthington, a prominent Washington socialite, has asked Wu to bid on a large charity event she is hosting in late June The limousine company she had hired has canceled at the last minute, and she needs the service of five limousines for four hours each She will only hire Exclusive Limousines if they take the entire job Wu checks his schedule and finds that he only has three limousines available that day Required If Wu accepts the contract with Worthington, he would either have to (a) cancel two prom contracts each for one car for six hours or (b) cancel one business event for three cars contracted for two hours each What are the relevant opportunity costs of accepting the Worthington contract in each case? Which contract should he cancel? Wu would like to win the bid on the Worthington job because of the potential for lucrative future business Assume that Wu cancels the contract in requirement with the lowest opportunity cost, and assume that the three currently available cars would go unrented if the company does not win the bid What is the lowest amount he should bid on the Worthington job? Another limousine company has offered to rent Exclusive Limousines two additional cars for $300 each per day Wu would still need to pay for fuel and driver wages on these cars for the Worthington job Should Wu rent the two cars to avoid canceling either of the other two contracts? 11-39 Opportunity costs (H Schaefer, adapted) The Wild Orchid Corporation is working at full production capacity producing 13,000 units of a unique product, Everlast Manufacturing cost per unit for Everlast is: Direct materials Variable direct manufacturing labor Manufacturing overhead Total manufacturing cost $10 14 $26 Manufacturing overhead cost per unit is based on variable cost per unit of $8 and fixed costs of $78,000 (at full capacity of 13,000 units) Marketing cost per unit, all variable, is $4, and the selling price is $52 A customer, the Apex Company, has asked Wild Orchid to produce 3,500 units of Stronglast, a modification of Everlast Stronglast would require the same manufacturing processes as Everlast Apex has offered to pay Wild Orchid $40 for a unit of Stronglast and share half of the marketing cost per unit Required What is the opportunity cost to Wild Orchid of producing the 3,500 units of Stronglast? (Assume that no overtime is worked.) The Chesapeake Corporation has offered to produce 3,500 units of Everlast for Wild Orchid so that Wild Orchid may accept the Apex offer That is, if Wild Orchid accepts the Chesapeake offer, Wild Orchid would manufacture 9,500 units of Everlast and 3,500 units of Stronglast and purchase 3,500 units of Everlast from Chesapeake Chesapeake would charge Wild Orchid $36 per unit to manufacture Everlast On the basis of financial considerations alone, should Wild Orchid accept the Chesapeake offer? Show your calculations Suppose Wild Orchid had been working at less than full capacity, producing 9,500 units of Everlast, at the time the Apex offer was made Calculate the minimum price Wild Orchid should accept for Stronglast under these conditions (Ignore the previous $40 selling price.) www.downloadslide.net assignMent Material 11-40 Make or buy, unknown level of volume (A Atkinson, adapted) Denver Engineering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines The starter assemblies are currently manufactured in Division of Denver Engineering The costs relating to the starter assemblies for the past 12 months were as follows: Direct materials Variable direct manufacturing labor Manufacturing overhead Total $ 400,000 300,000 800,000 $1,500,000 Over the past year, Division manufactured 150,000 starter assemblies The average cost for each starter assembly is $10 ($1,500,000 , 150,000) Further analysis of manufacturing overhead revealed the following information Of the total manufacturing overhead, only 25% is considered variable Of the fixed portion, $300,000 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued A further $200,000 of the fixed overhead is avoidable if production of the starter assemblies is discontinued The balance of the current fixed overhead, $100,000, is the division manager’s salary If Denver Engineering discontinues production of the starter assemblies, the manager of Division will be transferred to Division at the same salary This move will allow the company to save the $80,000 salary that would otherwise be paid to attract an outsider to this position Tutwiler Electronics, a reliable supplier, has offered to supply starter-assembly units at $8 per unit Because this price is less than the current average cost of $10 per unit, the vice president of manufacturing is eager to accept this offer On the basis of financial considerations alone, should Denver Engineering accept the outside offer? Show your calculations (Hint: Production output in the coming year may be different from production output in the past year.) How, if at all, would your response to requirement change if the company could use the vacated plant space for storage and, in so doing, avoid $100,000 of outside storage charges currently incurred? Why is this information relevant or irrelevant? Required 11-41 Make versus buy, activity-based costing, opportunity costs The Lexington Company produces gas grills This year’s expected production is 20,000 units Currently, Lexington makes the side burners for its grills Each grill includes two side burners Lexington’s management accountant reports the following costs for making the 40,000 burners: Direct materials Variable direct manufacturing labor Variable manufacturing overhead Inspection, setup, materials handling Machine rent Allocated fixed costs of plant administration, taxes, and insurance Total costs Cost per Unit Costs for 40,000 Units $8.00 $320,000 4.00 160,000 2.00 80,000 8,000 12,000 80,000 $660,000 Lexington has received an offer from an outside vendor to supply any number of burners Lexington requires at $14.80 per burner The following additional information is available: a Inspection, setup, and materials-handling costs vary with the number of batches in which the burners are produced Lexington produces burners in batch sizes of 1,000 units Lexington will produce the 40,000 units in 40 batches b Lexington rents the machine it uses to make the burners If Lexington buys all of its burners from the outside vendor, it does not need to pay rent on this machine Assume that if Lexington purchases the burners from the outside vendor, the facility where the burners are currently made will remain idle On the basis of financial considerations alone, should Lexington accept the outside vendor’s offer at the anticipated volume of 40,000 burners? Show your calculations For this question, assume that if the burners are purchased outside, the facilities where the burners are currently made will be used to upgrade the grills by adding a rotisserie attachment (Note: Each grill contains two burners and one rotisserie attachment.) As a consequence, the selling price of grills will Required 491 www.downloadslide.net 492 ChaPter 11 deCision MaKing and releVant inforMation be raised by $48 The variable cost per unit of the upgrade would be $38, and additional tooling costs of $160,000 per year would be incurred On the basis of financial considerations alone, should Lexington make or buy the burners, assuming that 20,000 grills are produced (and sold)? Show your calculations The sales manager at Lexington is concerned that the estimate of 20,000 grills may be high and believes that only 16,000 grills will be sold Production will be cut back, freeing up work space This space can be used to add the rotisserie attachments whether Lexington buys the burners or makes them in-house At this lower output, Lexington will produce the burners in 32 batches of 1,000 units each On the basis of financial considerations alone, should Lexington purchase the burners from the outside vendor? Show your calculations 11-42 Product mix, constrained resource Wechsler Company produces three products: A130, B324, and C587 All three products use the same direct material, Brac Unit data for the three products are: Product Selling price Variable costs Direct materials Labor and other costs Quantity of Brac per unit A130 $252 B324 $168 C587 $210 $ 72 $ 84 lb $ 45 $ 81 lb $ 27 $ 120 lb The demand for the products far exceeds the direct materials available to produce the products Brac costs $9 per pound, and a maximum of 5,000 pounds is available each month Wechsler must produce a minimum of 200 units of each product Required How many units of product A130, B324, and C587 should Wechsler produce? What is the maximum amount Wechsler would be willing to pay for another 1,200 pounds of Brac? 11-43 Product mix, special order (N Melumad, adapted) Gormley Precision Tools makes cutting tools for metalworking operations It makes two types of tools: A6, a regular cutting tool, and EX4, a highprecision cutting tool A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine The following information is available: Selling price Variable manufacturing cost per unit Variable marketing cost per unit Budgeted total fixed overhead costs Hours required to produce one unit on the regular machine A6 $ 200 $ 120 $ 30 $700,000 1.0 EX4 $ 300 $ 200 $ 70 $1,100,000 0.5 Additional information includes the following: a Gormley faces a capacity constraint on the regular machine of 50,000 hours per year b The capacity of the high-precision machine is not a constraint c Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the highprecision machine This cost is charged entirely to EX4 because Gormley uses the machine exclusively to produce EX4 The company can cancel the lease agreement for the high-precision machine at any time without penalties d All other overhead costs are fixed and cannot be changed Required What product mix—that is, how many units of A6 and EX4—will maximize Gormley’s operating income? Show your calculations Suppose Gormley can increase the annual capacity of its regular machines by 15,000 machine-hours at a cost of $300,000 Should Gormley increase the capacity of the regular machines by 15,000 machinehours? By how much will Gormley’s operating income increase or decrease? Show your calculations Suppose that the capacity of the regular machines has been increased to 65,000 hours Gormley has been approached by Clark Corporation to supply 20,000 units of another cutting tool, V2, for $240 per unit Gormley must either accept the order for all 20,000 units or reject it totally V2 is exactly like A6 except that its variable manufacturing cost is $140 per unit (It takes hour to produce one unit of V2 on the regular machine, and variable marketing cost equals $30 per unit.) What product mix should Gormley choose to maximize operating income? Show your calculations www.downloadslide.net assignMent Material 11-44 Theory of constraints, throughput margin, and relevant costs Rush Industries manufactures electronic testing equipment Rush also installs the equipment at customers’ sites and ensures that it functions smoothly Additional information on the manufacturing and installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment): Annual capacity Equipment manufactured and installed Equipment Manufactured 310 units per year 275 units per year Equipment Installed 275 units per year 275 units per year Rush manufactures only 275 units per year because the installation department has only enough capacity to install 275 units The equipment sells for $45,000 per unit (installed) and has direct material costs of $20,000 All costs other than direct material costs are fixed The following requirements refer only to the preceding data There is no connection between the requirements Rush’s engineers have found a way to reduce equipment manufacturing time The new method would cost an additional $50 per unit and would allow Rush to manufacture 20 additional units a year Should Rush implement the new method? Show your calculations Rush’s designers have proposed a change in direct materials that would increase direct material costs by $2,000 per unit This change would enable Rush to install 310 units of equipment each year If Rush makes the change, it will implement the new design on all equipment sold Should Rush use the new design? Show your calculations A new installation technique has been developed that will enable Rush’s engineers to install seven additional units of equipment a year The new method will increase installation costs by $55,000 each year Should Rush implement the new technique? Show your calculations Rush is considering how to motivate workers to improve their productivity (output per hour) One proposal is to evaluate and compensate workers in the manufacturing and installation departments on the basis of their productivities Do you think the new proposal is a good idea? Explain briefly Required 11-45 Theory of constraints, contribution margin, sensitivity analysis Talking Toys (TT) produces dolls in two processes: molding and assembly TT is currently producing two models: Chatty Chelsey and Talking Tanya Production in the molding department is limited by the amount of materials available Production in the assembly department is limited by the amount of trained labor available The only variable costs are materials in the molding department and labor in the assembly department Following are the requirements and limitations by doll model and department: Chatty Chelsey Talking Tanya Materials/Labor Available Cost of materials and labor Molding Materials pounds per doll pounds per doll 36,000 pounds $8 per pound Assembly Time 15 minutes per doll 20 minutes per doll 8,500 hours $12 per hour Selling Price $39 per doll $50 per doll The following requirements refer only to the preceding data There is no connection between the requirements If there were enough demand for either doll, which doll would TT produce? How many of these dolls would it make and sell? If TT sells three Chatty Chelseys for each Talking Tanya, how many dolls of each type would it produce and sell? What would be the total contribution margin? If TT sells three Chatty Chelseys for each Talking Tanya, how much would production and contribution margin increase if the molding department could buy 900 more pounds of materials for $8 per pound? If TT sells three Chatty Chelseys for each Talking Tanya, how much would production and contribution margin increase if the assembly department could get 65 more labor-hours at $12 per hour? 11-46 Closing down divisions Ainsley Corporation has four operating divisions The budgeted revenues and expenses for each division for 2017 follows: Division Sales Cost of goods sold Selling, general, and administrative expenses Operating income/loss A $ 504,000 440,000 96,000 $ (32,000) B $ 948,000 930,000 202,500 $(184,500) C $960,000 765,000 144,000 $ 51,000 D $1,240,000 925,000 210,000 $ 105,000 Required 493 www.downloadslide.net 494 ChaPter 11 deCision MaKing and releVant inforMation Further analysis of costs reveals the following percentages of variable costs in each division: Cost of goods sold Selling, general, and administrative expenses 90% 50% 80% 50% 90% 60% 85% 60% Closing down any division would result in savings of 40% of the fixed costs of that division Top management is very concerned about the unprofitable divisions (A and B) and is considering closing them for the year Required Calculate the increase or decrease in operating income if Ainsley closes division A Calculate the increase or decrease in operating income if Ainsley closes division B What other factors should the top management of Ainsley consider before making a decision? 11-47 Dropping a product line, selling more tours Mechum River Anglers, a division of Old Dominion Travel, offers two types of guided fly fishing tours, Basic and Deluxe Operating income for each tour type in 2017 is as follows: Revenues (500 * $900; 400 * $1,650) Operating costs Administrative salaries Guide wages Supplies Depreciation of equipment Vehicle fuel Allocated corporate overhead Total operating costs Operating income (loss) Basic $450,000 Deluxe $660,000 120,000 130,000 50,000 25,000 30,000 45,000 400,000 $ 50,000 100,000 380,000 100,000 60,000 24,000 66,000 730,000 $(70,000) The equipment has a zero disposal value Guide wages, supplies, and vehicle fuel are variable costs with respect to the number of tours Administrative salaries are fixed costs with respect to the number of tours Brad Barrett, Mechum River Anglers’ president, is concerned about the losses incurred on the deluxe tours He is considering dropping the deluxe tour and offering only the basic tour Required If the deluxe tours are discontinued, one administrative position could be eliminated, saving the company $50,000 Assuming no change in the sales of basic tours, what effect would dropping the deluxe tour have on the company’s operating income? Refer back to the original data If Mechum River Anglers drops the deluxe tours, Barrett estimates that sales of basic tours would increase by 50% He believes that he could still eliminate the $50,000 administrative position Equipment currently used for the deluxe tours would be used by the additional basic tours Should Barrett drop the deluxe tour? Explain What additional factors should Barrett consider before dropping the deluxe tours? 11-48 Optimal product mix (CMA adapted) Della Simpson, Inc., sells two popular brands of cookies: Della’s Delight and Bonny’s Bourbon Della’s Delight goes through the Mixing and Baking departments, and Bonny’s Bourbon, a filled cookie, goes through the Mixing, Filling, and Baking departments Michael Shirra, vice president for sales, believes that at the current price, Della Simpson can sell all of its daily production of Della’s Delight and Bonny’s Bourbon Both cookies are made in batches of 3,000 In each department, the time required per batch and the total time available each day are as follows: $ Della’s Delight Bonny’s Bourbon Total available per day % & ' Department Minutes Mixing Filling Baking 30 10 15 15 15 660 270 300 ... www.downloadslide.net assignMent Material 1- 5 1- 6 1- 7 1- 8 1- 9 1- 1 0 1- 1 1 1- 1 2 1- 1 3 1- 1 4 1- 1 5 Explain the term supply chain and its importance to cost management “Management accounting deals only with costs.”... owners ISBN 10 : 1- 2 9 2-2 11 5 4-7 ISBN 13 : 97 8 -1 -2 9 2-2 11 5 4 -1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Sabon MT... (http://www.trefis.com/stock/ko/articles/327882/how-coke-ismaking-the-most-out-of-falling-soda-volumes/2 01 6-0 1- 0 5) urbanbuzz/Alamy Stock Photo 21 www.downloadslide.net 22 ChaPter the Manager and ManageMent aCCounting Financial